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FACULTY ECONOMIC AND MANAGEMENT SCIENCES

DEPARTMENT ECONOMICS

SUBJECT BASIC MACROECONOMICS

SUBJECT CODE E:MA 3572/8MA2572

DATE JANUARY 2O2O

DURATION 3 HOURS MARKS 100

SUMMEREXAMINATIONS

Examiner: Prof E. Ziramba(University of Namibia)

Examiner: Mr S. Kalumbu (University ofNamibia)

Examiner: Ms M. Johannes (University of Namibia)

Examiner: Ms M. Nangolo (University of Namibia)

Examiner: Ms P. Msiska (University of Namibia)

Moderator: Dr J.M. Nyambe (University of Namibia)

This question paper consists of l2 pages including this front page

Instructions
e There are four questions, answer All.
q Students can bring calculators'
e Marks for each part of every question are indicated.
e Draw clearly labeled diagrams where necessary.

UNIVERSITY OF NAMIBIA EXAMINATIONS

 Question I (40 marks)

1) Which of the following expenditures associated with the production of a new high-
performance SUV will be directly included in GDp?
A) the sale of bonds to finance the construction of the assembly plant
B) the purchase of used welding robots to assemble to vehicles
c) the purchase of new tires to be installed on the new vehicles
D) the purchase of new machine tools to manufacture the engines

2) Double counting (counting the same thing twice) in GDP accounting is avoided by not
including
A) net exports.
B) intermediate goods.
C) illegal activities.
D) depreciation.

3) which of the following is true regarding the circular flow diagram?

I. "Aggregate income" is the flow of income earned by firms.
il. Retained earnings are considered income eamed by firms rather than part of households'
income.
III. The government, households, and firms all have transactions in the goods market.
A) I only
B) I and II
C) I and III
D) III only

4) The aggregate production function shows that an economy increases its real GDp in the short
run by
A) developing new technologies.
B) increasing its physical capital stock.
C) using more labor.
D) exploring for new deposits of natural resources.

5) Which of the following statements are TRUE regarding the demand for labor?
I. The quantity of labor demanded depends on the real wage rate.
II. If the money wage rate increases and the price level rernains the same, the quantity of labor
demanded decreases.
A) I only
B) II only
C) I and II
D) neither I nor II
 6) If the population increases, then potential GDp
and employment
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

7) Full employment occurs when the

A) unemployment rate equals the natural unemployment rate.
B) structural unemployment rate equals tne rriciional unemployment
rate.
c) natural unemployment rate the frictional unemployment rate.
D) cyclical unemployment rate"q*1r
equals the natural ,n.-pioy-ent rate.

8) If unemployment equals the natural unemployment rate, then there

A) is zero unemployment.
B) is only frictional or structural unemployment.
C) are no job openings existing at the time.
D) is less than full employment.

9) Suppose the CPI last year is 121 and the CPI this year is
137. The correct method to calculate
the inllation rate is
A) (137 - 12t)t100: 0.16.
B) 137 x l2l = 258.
C) [(137 - 121)/121) x 100 :13.2.
D) (1371121) tOO 113.2.
' :
l0) In January 2013, Tim's Gyms, Inc. owned machines valued
at $l million. During the year,
the market value of the equipment fell by 30 percent. During
2ol3,Tim spent $200,000 on new
machines. During 2013, Tim's net investment totalled
A) St million.
B) -$300,000.
c) $200,000.
D) -$100,000.

11) If the goverrment runs a budget deficit, then

A) national saving is negative.
B) household but not business saving must pay for the deficit.
c) part of household and business suuirg finances the deficit.
D) national saving cannot fund investment.

12) The nominal interest rate approximately equals

which of the following?
A) the real interest rate minus the inflation rate
B) the real interest rate plus the in{lation rate
C) the real interest rate minus the growth rate of real GDP
D) the real interest rate plus the growth rate of real GDP

13) The following data show Uruguay's GDP using purchasing power parity in billions of
dollars.

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP($) 26.1 2s.8 23.3 24.3 27.9 30.1 33.9 37.2 40.2

Using the data, we can conclude that

A) Uruguay's economy reached a peak in 2000.
B) GDP per person in uruguay almost doubled between 2000 and 2008.
C) potential GDP in Uruguay doubled between 2000 and 2008.
D) Uruguay's economy was entered a recession in 2008.

14) Which of the following will NOT work to increase the rate of economic growth?
A) increase saving
B) limit competition from international trade
C) improve the quality of education
D) All of the above will work to increase the rate of economic growth.

15)Price indexes can overstate inflation because they

A) omit some quality improvements.
B) do not contain the prices of any used goods.
C) do not contain the prices of foreign goods.
D) do not contain the prices of services.

16)According to the Ricardo-Barro effect, govemment deficits

A) lead to a rise in the equilibrium real interest rate, crowding out investment.
B) lead to simultaneous increases in private saving and no effect on the equilibrium real interest
rate and investment.
C) lead to simultaneous decreases in private saving and decreases in the equilibrium real interest
rate and investment.
D) lead to a fall in the equilibrium real interest rate and a rise in investment.

l7) Which function of money refers to the use of money to solve the problem of a need for a
double coincidence of wants?
A) medium of exchange
B) unit of account
C) store of value
D) none of the above

l8The major role of a commercial bank is to

A) make mortgage loans.
B) sell shares and use the proceeds to buy stocks.
C) receive deposits and make loans.
D) restrain the growth of the quantity of money.

19) According to the quantity theory of money, in the long run, an increase in the quantity of
money results in an equal percentage increase in
A) the price level
B) the growth rate of real GDP
C) the inflation level
D) the growth rate of potential GDP

20) This question is based on the figure below

.-
o
a
bl0
o-
co^
98
go
o
g6
0)
o
c4

2.8 2.9 3.0 3. i 3.2 3.3

Reol money (trillions of 2005 dollors)

In the above figure, if the interest rate is 8 percent,

A) people sell bonds so as to convert them into money.
B) people buy bonds and the interest rate falls.
C) the Fed increases the quantity of money.
D) people buy stocks, because stocks are more liquid than currency.

21) If the U.S. current account balance is -$500 billion and the capital and financial account
balance is +$510 billion,
A) the U.S. official settlements account balance is $10 billion.
B) the U.S. government's holdings of foreign currency increases by $10 billion.
C) foreign investment in the United States is smaller than the U.S. investment abroad.
D) U.S. exports are greater than U.S. imports.
 22) Suppose that the U.S. govemment gives foreign
aid to Turkey. This transaction would
directly
A) increase the U.S. current account.
B) decrease the U.S. current account.
C) increase the U.S. capital and financial account.
D) decrease the U.S. capital and financial account.

23) When the U.S. dollar depreciates against the yen,

the yen and the exchange rate
A) appreciates; rises
B) depreciates; rises
C) appreciates; falls
D) depreciates; falls

24) rn the foreign exchange market, a change

in which of the following will result in a movement
along the demand curve for U.S. dollars?
A) the exchange rate
B) the U.S. interest rate
C) the interest rate in the foreign country
D) the expected future exchange rate

25).The components of aggregate expenditure

include
I. imports.
II. consumption.
III. government transfer payments.
A) I and II
B) II only
C) II and III
D) I, II and III

26) Real GDP

{) is
alwafs greater then aggregate income.
B) is always less than aggregate income.
c) might be less than or moie than aggregate income depending
on consumption.
D) is equal to aggregate income.

27) Induced consumption is equal to

A) saving when consumption equals disposable income.
B) consumption when disposabG income is zero.
c) consumption caused by an increase in disposable income.
D) dissaving when disposable income is greater
than zero.
:.:].:1T,:":t:o",t'ou:.:."",'ln"''1::::,,_0,,,1,o..,...
0J'a.
lJo
;Er)
o-
ro
5g
5r 8
Consumption funclion
_a:
EE
:lo
2'- 6
gE

0 2 4 6 8 ro t2
i,i.ir!&*i,:,i.,:.i.,;:,.,,'l:,1o,::br1 :"::'" [f i:,::,,*tj ?9?...f.9,.-19::l ,

The figure above illustrates an economy's consumption function. What is the marginal propensity
to consume in this economy?
A) 0.67
B) r.00
c) 0.7s
D) 0.33

29)For movements along the long-run aggregate supply curve,

A) potential GDP is dependent on the price level.
B) the prices of goods and services change while the prices of productive resources hold steady.
c) the price level and the money wage rate change by the same percentage.
D) All of the above are correct.

30) Suppose the price level rises and the money wage remains constant. This set of changes leads
to
A) an upward movement along the LAS curve.
B) an upward movement along the SIS curve.
C) a leftward shift of the SIS curve.
D) a leftward shift of the SIS curve and the LAS curve.
 31 ) This question is based on the figure below

6 LAS
3
il
tr)
o
O
N
.9
o
o
-o
.l.
o
()
'6
g
o
.U
L

AD
O 4 I 12 t6 ZO 2i
Reol GDp (hillions of 2005 dollors)
1 r,: l_rriri3.rt.rr.itr:.rriii9:.,it t?rriftu!r,rt.1.,iut,rrli\. .rr1n.:.

The data in the above figure indicate that the economy

will be in a long-run macroeconomic
equilibrium at a price level of
A) 140.
B) 130.
c) 100.
D) t20.

32)rlf aggregate demand decreases and neither short-run

nor long-run aggregate supply changes,

A) the price level increases in the short-run and decreases

in the long_run.
B) there is an inflationary gap.
C) there is a recessionary gap.
D) in the long run, the long-run aggregate supply will decrease.

33) which of the following could Nor start a demand-pull inflation?

A) increases in government expenditure
B) increases in net exports
C) increases in oil prices
D) increases in the quantity of money

34) During a demand-pull inflation, if the Central Bank

tries to maintain a level of real GDp
above potential GDp,
A) there will be a one-time shift in the AD and the curves.
B) the AD cwve will shift rightward continuously and^g4s
&4S curves will shift leftward
continuously.
C) the AD cwve will shift rightward continuously and
the SlScurve will not shift.
D) the S4S curve will shift leftward continuously and
the ADcurve will not shift.
35) Stagflation is the result of
A) an increase in aggregate demand.
B) a decrease in short-run aggregate supply.
C) a decrease in aggregate demand.
D) an increase in short-run aggregate

36) A rational expectation is

A) a forecast devoid of all emotions.
B) a forecast which perfectly foretells the future.
C) the best possible forecast based upon all relevant information.
D) the forecast that automatically carries over from past forecasts.

37)All of the following are part of fiscal policy EXCEPT

A) setting tax rates.
B) setting govemment spending.
C) choosing the size of the government deficit.
D) controlling the money supply.

38) If a tax cut increases people's labor supply, then

A) tax cuts increase potential GDP.
B) tax cuts decrease aggregate demand.
C) tax cuts cannot affect aggregate demand.
D) Both answers A and B are correct.

39) If the Bank of Namibia wants to increase the quantity of money, it can
A) lower income tax rates.
B) purchase govemment securities.
C) increase the govemment budget deficit.
D) raise the exchange rate.

40) This question is based on the figure below

 6
O
lt
rr)
<)
o sAsl
N
o
o
o sAso
-o
o-
a
()
T
o)
o
.;u
o-

*tol
,.:::. .,, ,
GDP {trillions of 2oos.fo1forsf
, .

In the above figure, if the economy is initially at point d, the short-run effect of a cut in the repo
rate is given by movement from point
A) dto point c, increasing output and decreasing the unemployment rate.
B) dto point a, increasing output and decreasing the unemployment rate.
c) d to point b, increasing output and decreasing the .rr"rnployment rate.
D) dto point D, keeping output and the unemployment rate constant.

Question 2 (20 marks)

Indicate whether each of the following statements is True or False (Write the word in full)

2.1The expenditure approach to measuring ooP@

-\r/ages.
2.2 )Household production is not measured in the GDp.

2.3If a nation's population grows, then, th

person.

2.4)The real wage rate measures the dollaiffi

2.5) Structural unemployment is associatea *
industries.
2.6) Structural unemployment occurs eren *h
unemplqrment rate.
2.7)Expected profit and the real interest rate afffi
2.8)Theterm''crowdingout''relatestothedecr
from an increase in investment.

10
2.9)If actual reserves are 100 when deposits are 400, then definitely the desired
reserve ratio is 0.25.
2.10) If nominal GDP equals $10 trillion and the velocity of circulation is 5, then
the quantitv of monev is $2 trillion.
2.1 l) The SIS curve shifts if there is a change in the price level.

2.12)The level of output at which the short-runaggregate supply curye and the
aggregate demand curve intersect is the full employment level of GDP.
2.I3) A change in the real interest rate creates a movement along the consumption
function.
2.14)If the change in autonomous investment equals $1 trillion and the change rn
real GDP equals $4 trillion, the multiplier equals l/4.
2.15) When disposable income equals consumption expenditure, then saving is
zefo.
2.16) The Phillips curve describes the relationship between real GDP and inflation.

2.17) The short-run Phillips curve intersects the long-run Phillips curve at the
expected inflation rate.
2.18). An increase in taxes on labor income decreases potential GDP.

2.19). A fiscal stimulus is used to increase production and employment.

2.20) Monetary policy is controlled by the Bank of Namibia.

QUESTION 3 (20 marks)

The table below shows some data for Wiland, a country whose cunency is the bont. The official
settlement balance, net interest income, and net transfers from abroad are zero.

ltem Billions of bonts

GDP 320
Sonsumption expenditure 200
Govemment expenditure on
60
qoods and services
nvestment 80
Bxports of soods and services 40
3ovemment budset deficit 25

a) What is Wiland's imports of goods and services?

b) What is Wiland's current account balance?
c) What is Wiland's capital account balance?
d) What is Wiland's net taxes?
e) What is Wiland's private sector balance?

1,1
QUESTION 4 (20 marks)
This question is based on the Figure below.

q?
co
?Ezo
(r-
(!!o
68
5S16
E3
EC
3.9,4
O!

o4812162A24
Disposoble income (trillions of 2005 dollors!

a) In the above diagram, what does the 45-degree line indicate? (3 marks)
Uj Uow much is the autonomous consumption? (3 marks)
.jWnut is the marginal propensity to consume? (3 marks)
i; Uo* much is tte inauc"d when real GDP is $12 trillion? (3 marks)
"or,r,r-ption
Ho* much is the saving when disposable income is $12 trillion?
(3 marks)
"j
g Oerive the savings funciion and illustrate it graphically.
(5 marks)

END OF PAPER

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